29 July 2003

I think the terror futures market is a fascinating idea, and I wish I'd thought of it first. Wait a minute: I did. A few months ago, Haiwen and I were talking about how you can establish a futures contract on literally anything, and we came up with the idea of Korean mass grave futures. As usual, we were just ahead of the Times.

That said, I'm not sure this idea will work. An open market can be an incredible way of aggregating information and making it visible in the form of prices, but because people in the securities markets are usually based in finance, it's usually most useful at predicting financial information. When it comes to other areas where the traders don't have any particular expertise, the results are less useful. Just as an obvious example, the Hollywood Stock Exchange isn't very effective at predicting the weekend box office, which makes me doubt that this site will have any particular edge at predicting events that are months, years, or decades in the future.

Another problem is that the markets are much better at pricing securities that are backed by an asset that can be (at least theoretically) valued. Stock prices, again in theory, are based on future expected dividends; option prices, on a number of factors, most importantly the price and volatility of an underlying stock; commodities futures prices, on the spot price of the commodity and other factors like carrying costs and interest rates. These are all factors to which you can assign a dollar value without too much trouble. But to my knowledge, there's no good way of valuing a single future on a political event. If there were a valuation method, it would take a lot of time and money to develop, which seems unlikely given the penny-ante nature of the futures prices involved.

Still, you never know what those pesky hedge funds will do next.

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